August 2012

August 28, 2012

Those who enjoy the great outdoors and are interested in going off the beaten path in Brazil often travel a long way, heading to the Amazon, the Pantanal, or out to Fernando de Noronha. But for those with less time or money heading to Rio who are also interested in seeing some beautiful, wild places, I have two suggestions worth considering.

The first is a no-brainer: Ilha Grande. Accessible by boat or ferry from the ports of Mangaratiba and Angra, the aptly named Big Island is a relatively quick journey from Rio with lots of day trip boat tours. But it's worth it to stay the night. The island is a popular destination for foreign tourists, though less so for Americans. Development is very limited, and accomodations are basic. While some chose to stay in the main port, Abraão, one of the most beautiful places to stay is Palmas.

In Palmas, there are a scattering of small homes, a restaurant, a campsite, and two pousadas overlooking the beach. Both pousadas have gorgeous views of the bay with simple accomodations and electricity that goes off around 10pm. Tapera das Palmas, on the far end, boasts a large patio with stunning views and rooms overlooking the ocean. Run by an affable paulista and her sweet chatterbox daughter, the pousada also offers excellent and reasonably priced meals, with a yummy breakfast of tropical fruits and pastries included. Local characters also include an angry rooster ("Watch out--he bites," the owner warned us) and the lovable local dog, James. There's also a small dock where you can hail a boat taxi or sit and watch the sunset.

Both pousadas can only be reached on a short trail, where you might spot tropical birds, micos, snakes, and other wildlife. While you can take a 20 minute boat ride from the main port to Palmas, you can also hike there from Abraão, with spectacular views on the way.

Palmas has a lovely little beach, but one of its main perks is its proximity to Lopes Mendes Beach, considered one of the most beautiful in Brazil. At Lopes Mendes, there are a few vendors and a small building at the far end of the beach, but the beach is otherwise empty. If you get there early enough, you can walk nearly the whole length of the sand without seeing another soul.

But if you want to really go off the beaten path, you can head inland, leaving Rio for the mountains of Minas Gerais: specifically, Ibitipoca State Park. (In Tupi-Guarani, Ibitipoca means Serra Fendida, or Split Mountains.) It's easiest to drive--between 3.5 and 4 hours--but you can also take a marathon of buses from Rio to Juiz de Fora, Juiz de Fora to the small town of Lima Duarte, and from Lima Duarte to Conceição do Ibitipoca.

The park itself encompasses 15 square kilometers of rolling forests, soaring rock outcroppings, and beautiful waterfalls. Managed by the state government, the park is one of the cleaner, better-run parks you'll find in this part of Brazil. There are a number of trails to chose from, including the toughest Janela do Céu (Window to Heaven) and the easiest, Circuito das Águas (the Water Circuit). On the Water Circuit, you can dip your feet in a tea-colored stream along a mountain "beach," swim in waterfalls, dangle over cliffs, and climb in grottoes.

While the vistas alone make the trip worthwhile, you might be lucky to spot some of the local fauna, ranging from cougars to Brazilian wolves (lobos guará), from several species of monkeys to ‪the vinaceous-breasted amazon‬ bird and toucans, to the coati.

You can camp in the park or nearby, or stay at one of the many pousadas in the small mountain town of Conceição do Ibitipoca. There are also a wide variety of chalets to rent with basic but cozy accomodations. In town, you'll find a scattering of stores and restaurants, as well as a grocery store proudly announcing a butcher--coming soon!--and a number of town announcements, including a local forronejo show (bom demais!). It's a great place to eat delicious comida mineira and try xiboquinha, a delicious concoction of cachaça, cinnamon, and honey, as well as cloves, lime, ginger, and herbs.

August 26, 2012

Just a quick note that I've been in Brazil for the past two weeks, hence the break from the blog. I have lots of fun posts coming up, starting this week. Also, I'll be back in gear on Twitter and Tumblr. Thanks for your patience and stay tuned!

August 10, 2012

The London Olympics come to an end on Sunday with a big Brazilian performance during the closing ceremony to mark the next games in Brazil. With the conclusion of the London games, the reports on Rio's preparedness for 2016 are bubbling up yet again. But it wasn't exactly smooth sailing in the UK. London's experience provides some insight ahead of the games in Rio.

Traffic was a problem, despite an extensive subway system. The city set up "Olympic lanes" for athletes, which caused confusion and traffic during the beginning of the games. And despite the special lanes, traffic caused delays for athletes arriving at several events.

Event attendance was less than expected, leading the government to call in the military to fill empty seats. In addition, some corporate sponsors, athletes' families, and other ticketholders with reserved seats failed to use them. Another issue was the fact that 50,000 tickets were held by foreign agencies trying to sell last-minute tickets at inflated prices. The huge swathes of empty seats caused an uproar in the UK.

London's local businesses actually suffered during the Olympics, leading economist Nouriel Roubini to dub the games "an economic failure." After warnings for Londoners and tourists without Olympics tickets to avoid public transportation during the games, parts of the city normally swarmed with tourists were practically empty. The city's taxi drivers association estimated a 20-40 percent reduction in passengers, and the British Museum said visitor flows had fallen around 25 -30 percent. Retail stores and restaurants also reported considerably fewer customers.

After some initial concerns about security at the games, as of Friday evening there were no major incidents. However, the security preparations prior to the Olympics ended in scandal when security corporation G4S was unable to provide enough personnel, leading the military to send in soldiers to make up for the shortfall.

The immediate economic benefits of the games are still unclear. Prime Minister David Cameron said the games could bring in revenues of $20 billion over the next four years. But the costs of holding the Olympics overran the initial budget, and are now estimated at between $16 and $20 billion.

In spite of these experiences, Rio officials assured the international media that steps are being taken to avoid similar problems. Rio Mayor Eduardo Paes said infrastructure projects would increase the city's public transport capacity from 18 percent of the population to 60 percent. He also said the city didn't intend to waste money on stadiums that would only be used for the Olympics, like China's now infrequently-used bird nest stadium. Leonardo Gryner, director general of Rio 2016, said empty seats wouldn't be a problem, and that the city would use a text message alert system to announce last-minute available seats. He assured that unlike London, Rio wouldn't be empty during the games. Questioned about security, he went as far to say that Rio is one of the safest parts of Brazil. He also said all construction would be ready in time. But if London came under scrutiny for the Olympics, one can only imagine what South America's first Olympics host can expect.

Because of the upcoming World Cup and Olympics, Brazilian authorities are under much more pressure to make improvements to Rio, particularly in security and infrastructure. Such investments have potential to bring the city important long-term benefits. But with one of the worst public health systems of all of Brazil's state capitals, one of the cities with the largest number of dengue cases in the country, the state with the second-highest incidence of tuberculosis in Brazil, and the third-worst performing high school system of the country's state capitals, investments in health and education are critical. (H/T Diário do Rio) What matters for Rio, after all, is far beyond a two-week stretch of sporting events.

August 01, 2012

You may know him from his economics blog or his lively bilingual Twitter feed, but you may not know the man behind The Drunkeynesian. A 32-year-old paulistano, Luciano Sobral is a Brazil-based economist with an impressive resumé and online presence. I picked his brain on a number of issues, and he explained his thoughts on the outlook for the Brazilian economy. He had some interesting perspectives on Brazil's interest rates and inflation rates, as well as his take on Brazil's growth. Have a read below.

Tell me about your work as an economist and what you're up to now.

I became an economist almost by accident. When I started working with financial markets, I was a chemical engineering student. I didn’t like most of the subjects and was pretty convinced I had to drop out, but didn’t have any idea of what to do next. After a year of working at the treasury department of a big European bank, I changed to economics. During the first term of the new course, I was lucky to have an excellent and very inspirational professor in an introduction to the history of economic thought, and his classes and readings convinced me that I was on the right track. A couple of years later, I changed from treasury to economic research and became responsible for covering global economics for Brazilian clients and local markets (FX and interest rates) to foreign clients, which was a great way to learn how to look at the bigger picture and express ideas.

In 2007, I (finally) finished college and was invited to join a brand new investment management company, where I’m still working, now as a partner. My job today mostly consists of finding trading opportunities for a global macro fund focused in liquid markets (interest rates, equities, FX, and commodities). It’s an exciting challenge for an economist: you have to unlearn a great deal of what you were taught in the college and learn how to be flexible, non-dogmatic, eclectic, patient, curious, humble, and disciplined. I see financial markets as a huge laboratory, where your convictions and biases are tested continuously, in real time.

Parallel to that, in 2007 I also started blogging. The initial intention was to fill a vacuum I perceived between what went to the local press and some of the most sophisticated aspects of the markets and economics, trying to make myself understandable to the lay but interested reader. Blogging was quite sporadic until May 2009, when I managed to start a routine of almost daily posts that I've kept until now. My blog and Twitter account are both great fun and very useful work tools. It’s nice to keep a log of readings and ideas; it helps a lot in keeping you intellectually honest and identifying your hits and misses. On top of that, I was lucky to gather some very nice readers, with whom I keep a continuing and helpful dialogue.

Apart from my job and personal blog, I’m currently blogging for Global Economic Symposium, a big conference taking place in Rio in October. I'm also obsessively following the Olympics and looking forward to visiting Iceland and Norway on my next holiday in September.

What's your outlook for the Brazilian economy through the end of 2012?

I think the most important thing to watch until the end of the year (locally, if the European Union doesn’t fall apart and if China doesn’t crash--two big “ifs”) are the consequences, both in economic activity and inflation, of the huge paradigm change in the level of interest rates and the conduction of monetary policy. A large share of the market is still not yet convinced that Brazil can live with the current level of interest rates and believe inflation will surge as soon as growth resumes. I think the relationship between interest rates and inflation in Brazil is quite elusive. Whether annual inflation reaches the desired target or not (4.5 percent in the calendar year) is largely defined by factors the Central Bank can’t control, such as commodity prices, wage negotiations, and indexation of contracts. In this sense, I think a likely scenario is one of raising inflation (since food prices rose sharply and non-tradable prices are sticky), the Central Bank keeping interest rates at historically low levels (it may raise the policy rate a bit), and the government trying to curb inflation cutting some taxes and restructuring the way past inflation affects the renegotiation of some contracts, mainly rent and utilities. Some will compare these measures to Argentina-style manipulation, but I don’t agree. It’s the right thing to do looking beyond a period of few months: it attacks part of the roots of structurally high inflation. It’s the kind of risk I think is worth being taken: if the plan works, Brazil will finally have interest rates comparable to the rest of the world and will be on the right track to lower inflation over the medium/long term. If not, we know the path of orthodox interest rate shocks well.

What is really worrying me is the relationship between growth, company profits, and wages. We’re in a situation where growth is null or very weak (there’s little time to a recover until the end of the year), most companies stopped making money, wages continue to grow in real terms (part of a deliberate income distribution policy based on a continuing rise of the minimum wage, which is adjusted annually according to past inflation and GDP growth) and the government is forcing some large companies such as automakers not to fire workers. This is leading to a massive squeeze in profit margins, killing the “animal spirits” that drive private investment. I’m not totally against the government intervening in the economy, but currently its hand is too heavy in Brazil. It should concentrate on creating positive externalities to companies, investing in infrastructure and education, and simplifying labor and tax laws.

What's your take on the latest measures from Dilma's administration to stimulate the economy?

Paraphrasing a late Brazilian economist, among Dilma team’s ideas there are some good and new ideas. Trouble is the good ideas are not new, and new ideas are not good. Broadly speaking, I like the tax cuts, don’t like the way public banks are being used to concede subsidized credit to huge and not very innovative companies and to force a tightening in credit spreads. I’d rather focus on infrastructure and education spending than intervene in the financial system. Most of the current spending plans are either innocuous (too small and specific to make any difference on aggregate growth) or related to the upcoming World Cup and Olympics. It may be nice and attractive to build huge sporting venues, but we can’t forget facts such as: our education system is one of the worst in the world given our income level and half of the homes in the country don’t have adequate sewerage. Too little is being done to address these and other fundamental problems.

What do you think is Brazil's biggest weakness to try to fight off the effects of the eurozone crisis? Its biggest advantage?

One weakness directly related to the eurozone crisis is the huge amount of money European companies have invested in Brazil. Though unlikely now, I can imagine a situation where European companies see themselves forced to repatriate money, and this can potentially damage Brazil's foreign reserves. Another weakness this not exclusive to Brazil is the dangerous idea that is possible to eliminate or control business cycles--that it’s just a matter of government will. This leads to hyperactivism and all sorts of unintended consequences and wrong incentives. Governments should let markets correct themselves. Bad investment decisions should be confronted with the reality and, occasionally, be punished. Unfortunately this vision is the total opposite to the spirit of our times, and I think Brazil will not act differently from the rest of the world.

A particular aspect of government hyperactivism in Brazil is the influence of the state in the labor market I mentioned above: companies which were helped with loans from the development bank (BNDES) and tax cuts suffer from huge government pressure to not fire workers. I see at least a couple of problems emerging from this. First, adjustments in labor market and inflation are slowed. Second, workers become divided in two classes: those with somewhat secure jobs and those who have to compete in the market.

Brazil’s biggest advantage is its closed economy--its ratio trade flow / GDP is among the lowest in the world. This makes exchange rate adjustment quite painful, but once it’s done, the hit to domestic activity from a plunge in global trade is much less severe than in other emerging countries. Another positive aspect is that Brazil now finances almost all its budget deficit in local markets, and the outstanding amount of sovereign dollar denominated debt is negligible (plus we have a decent stock of reserves in foreign currency--not as large as it appears to be, given the huge external private liabilities). Fiscal accounts are not brilliant, but looking at the rest of the world, Brazil looks like a stronghold of austerity.

What is the one thing (if any) that foreign economists don't understand about Brazil?

It’s hard to generalize; some foreign economists understand Brazil much better than many of my native colleagues. That said, one aspect often misunderstood--and we can partially put the blame on the “BRICs-mania”--is that Brazil is no longer a high growth country, at least not at the same league as India and China. China is now reaching the level of GDP per capita Brazil had in the late 1970s, after its own period of very strong growth (the years of the “economic miracle”); and India is much poorer, thus with more potential of large periods at a fast pace of growth. I see no evidence to believe Brazil’s potential growth is anything above the average of the past 10 years (around 3.8 percent per year). This was a period of a commodities boom and improving terms of trade that seems to be over (or at least halted). The commodities and global growth bonanza may be compensated by the larger investment rate, but I’m still not convinced net effects will be positive over the coming years.

Another misconception is that Brazil, at current prices, offers high rates of return for investment. Brazil remains an expensive country (less than a year ago, but still expensive), the exchange rate is still overvalued, and interest rates already moved down a lot, so the potential for asset appreciation is much lower than it used to be. Huge foreign flows entered the country at an exchange rate below 2 reais per U.S. dollar and the illusion the country could grow at 5 percent for several years; it’s very likely the expectation of returns on these investments will be frustrated. One must be very selective to make good investments in Brazil today. The days when the improving macro environment compensated less sound or poorly researched decisions are definitely over.